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Tesla has reached a preliminary deal with the Chinese government to build its next gigafactory in Shanghai, with a plant that can make 500,000 cars a year.

The Shanghai government confirmed the deal in a statement this morning, after reports surfaced earlier today surrounding Tesla chief executive Elon Musk's visit to the city. Bloomberg added that he is set to follow up with visits to Beijing tomorrow and on Thursday.

The company currently ships more than 15,000 cars a year to China, and yesterday bumped up the price tags of its Model S and Model X cars by up to $37,600 (£28,226) due to a fresh 40 per cent tariff on the importation of US-made cars.

Read more: Tesla hikes its car prices in China in the face of rising tariffs

Tesla's share price was up 2.24 per cent as markets opened in New York.

The company revealed plans to build its first foreign factory in Shanghai at its annual shareholder meeting at the beginning of June, in an apparent bid to avoid said import tariffs.

Musk said at the time that its new so-called dreadnought factories would produce both batteries and assemble vehicles in one place.

In the US, Tesla operates one gigafactory in Nevada where it makes batteries for both its cars and home energy products, and another factory in California where it assembles vehicles.

Read more: Tesla's engineering boss steps down as its share price wavers

The news that the Shanghai factory will support the creation of 500,000 cars per year is staggering compared to the company's current production numbers of about 88,000 cars so far in 2018.

China accounts for roughly 17 per cent of Tesla's annual revenue, according to regulatory filing.

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